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The Tendency Toward Promiscuity in the Ad Industry

To date, I’ve spent nearly my entire career working in the ad business. Through the years I’ve gotten to see the industry from a few different angles. I started out at an ad agency in a media planning/account management role, then moved to analytics, and now I work for a technology company. During my time in the industry I’ve noticed a strange tendency that permeates the ad industry: promiscuity.

Now, I’m not talking about sexual promiscuity, or specifically about the people in advertising, but rather, I’m referring to business relationships and client/vendor promiscuity. At nearly every level of the industry, companies tend to lean toward working with multiple vendors to meet their advertising needs. Said a different way: nobody wants to get stuck in a situation where they are too reliant on any one company for advertising-related needs.

Let me share an example.

When I worked in the agency world, I had the opportunity to service about a half dozen different clients in a handful of different industries. I helped advertise everything from cars, to financial product, to pharmaceuticals. Each of the clients I worked with had unique needs and different preferences when it came to advertising and media – however they all shared the preference for promiscuity. In fact, almost all of them actually used multiple full-service agencies to service each single account. At first, I remember thinking that it made absolutely no sense. My agency had the ability to service an entire account (from creative, to media, to strategy) in house, so why would a client want to cut up their business into multiple parts and hand one part (e.g. media) to one full-service agency, and give another part (e.g. creative) to a different agency? From my perspective as a media planner, it was incredibly inefficient. Having a team spread across multiple agencies led to all sorts of problems. It was frustrating, political, and difficult to get things done. One advertiser I worked with actually employed five different agencies to service one single account. Life would have been so much easier if our clients had just used our agency for all of their advertising needs.

Why didn’t they?

I originally thought the reason was because they wanted specialists. One agency was better at media – so they’d use their media department. Another agency was better at digital creative – so they’d use their digital creative department, etc. However, I soon learned that this theory was wrong. The real reason our clients used multiple agencies to service their accounts was because they wanted to limit their liability if any one agency were to go downhill, and they also wanted to minimize the pricing power agencies had over them.

Let me spend a little time here.

If you’re an advertiser that uses only one agency for all of your needs (from creative, to media, to strategy, etc.) and there is a problem at that one agency – for example, they win a new piece of business and pull all their best people onto that new account – then you’re flat out of luck. You have no other agency options to lean on to ensure there is no interruption to your business. Also, during contract renewal, if you rely solely on one agency, that agency has more leverage over you in the pricing negotiation. Since they are the only agency that really knows your business, they can exploit that fact and try to increase their prices year over year. However, if you have two agencies (or more) working on your business, each agency will try to undercut each other to win more of your business and you will be able to get continually lower prices out of your agencies.

This tendency toward promiscuity trickles down the supply chain as well.

As a media planner I would always make sure that I had at least three or four different media vendors from each category (e.g. ad networks, portals, etc.) on my media plan so none of them were absolutely essential to the plan. If any one vendor tried to raise their prices, or change their quality of product, I would simply cut them from the media plan and shift spend to their competitors. Always keeping vendors in competition with each other ensured that my agency would get better prices for our media each year.

By maintaining promiscuity and exerting continual downward pricing pressure, advertisers and agencies send ripple effects down the supply chain to media vendors like websites, networks and ATDs (agency trade desks). These sources of advertising must also play the promiscuity game, maintaining at least two technology partner relationships that they can play off each other to make sure they too don’t give anyone too much pricing power.

In some ways, the entire advertising industry is woven together in a web of promiscuity that ensures no one player ever gains pricing power over any other. It can take years, but sooner or later all advertising entities are destined to have their margins compressed to the point of commoditization.

In the long run, the only advertising businesses that will be successful are the ones that can maintain pricing power by continually offering things that are truly novel, or providers that thrive in a commoditized market.

Hardly just advertising – the importance of having multiple vendors has been a key issue in supply chain management for a while (vendor management, IIRC). Vendors, in turn, respond by offering volume-incentivizing discounts. For instance, staged discounts, e.g. 5% kickback if you hit XXX volume, negotiated based on what percentage share of the client’s business the vendor thinks that is. Not sure to what extent that occurs in advertising, but it’s pretty common elsewhere.

It only works (well)* if you’re offering a commodity, as you note, but agencies are pretty much glorified outsourcing firms (much like consultants). You’re buying people, except that the client doesn’t have direct say over most of the hiring process (for better and for worse).

Also:

> In fact, almost all of them actually used multiple full-service agencies to service each single account. At first, I remember thinking that it made absolutely no sense. My agency had the ability to service an entire account (from creative, to media, to strategy) in house, so why would a client want to cut up their business into multiple parts and hand one part (e.g. media) to one full-service agency, and give another part (e.g. creative) to a different agency?

Well then, what’s the difference between that and having the entire thing in-house, at a (significantly) lower cost? For larger accounts, anyway, who negotiate for some of FTEs to service their account.

* Customers can be (surprisingly, fro the vendor’s PoV) very willing to accept higher prices / inferior outcomes in order to avoid being locked into a single vendor. It’s only important once in a while (when a vendor fails) but when it happens it can make/break business for the customer. If there’s ever an outage / failed delivery, you can expect at least a slide about “Avoiding Downtime with Managed Partners” in the sales presentations of the customer (to their customers) for the next 2+ years, with a “case study” of how they won business away from a less-fortunate competitor.

P.S. There’s a lot of material on how to run a business in a commodity market. I’m no expert, but I’ve done some work in largely-commodified markets (industrial supplies, paper, lumber, freight rail).

Very interesting point re: vendors using incentives (kickbacks) to incentivize clients to take more supply chain risk. I really like that point and it actually applies pretty accurately to the advertising industry.

Also, interesting point about the mechanics of supply chain management only applying to commoditized fields. It seems to me that the advertising industry often operates like a commoditized industry even though it isn’t. I’m going to spend a little more time thinking about that one.

I wouldn’t say that supply chain management only applies to commoditized fields – rather, that customers tend to diversify more. Vendors like to roll out product upgrades (to de-commodify, or prevent commoditization) where customers may want to encourage commoditization to enable greater supplier flexibility, or have a better price edge, etc. When a vendor truly has a unique/better product, they can (and do) charge premium prices for it — until their competitors can clone the feature, then the price drops back down.

I’m interested in the extent to which customers are willing to have a worse experience, in order to have more vendor flexibility (and pricing power). A customer may elect to not use a premium feature of a vendor, even if it can clearly save them time/money, in order to work with (have no process differences between) two other vendors that don’t support the feature. As well as the ability for the vendor to overcome that, or sell into the customer without requiring customer process change.